Two Louisville, Ky.-based health systems are squeezing savings out of their supply chain by taking group purchasing to the local level.

While membership in a group purchasing organization on its own can produce savings for a hospital or health system, Norton Healthcare and Baptist Health are looking to increase savings even further by trying to combine and standardize purchasing for selected supplies.

The first step in the arrangement — an agreement to buy medical and surgical supplies — is expected to save $15 million between the two over the life of the five-year contract.

"It's a different model," says George Hersch, vice president of materiel management for Norton, a five-hospital system. "We're pretty excited and proud of it."

Norton and Baptist decided to negotiate together to create standards for supply purchases to achieve greater volume discounts. Baptist owns seven acute care hospitals. Though they negotiate the purchasing agreements together, the two systems sign separate contracts with the seller or distributor of the supplies. Hence, even though the systems' joint purchasing agreement is only three years long, they were able to sign five-year agreements with supplier Medline Industries Inc.

"We're not a merged entity at all, we're just working together. So we have to have separate contracts, even though the terms and conditions line up to be the same," Hersch says.

With a med-surg agreement in place, Hersch says the two are looking to expand the effort. Consolidation of pharmacy purchasing is one area under consideration. "That should produce significant savings based on what we saw in med-surg," he says.

Hersch also says the two are considering the adoption of a competitive-bid reverse auction for commodities. They would identify bidders for a commodity, such as trash can liners, and allow them to use a third party to competitively bid online for the business. "The parties can keep bidding lower until nobody wants to bid anymore," he says.

The collaboration between Norton and Baptist, though unusual, has worked well enough so far that others might be interested in the concept.

"Who would think that competitors would come together to benefit the [residents] of their community by reducing costs?" Hersch says. "I wonder if it might spring up in other communities."